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Friday, August 29, 2008

Asian Market Fallout Set To Get Far Worse

Source : The Business Times, August 29, 2008

Property, stocks will be hit bad as foreign capital is pulled: symposium speakers

FALLOUT in Asian financial markets and institutions from the sub-prime crisis could become more serious now as foreign capital, from the US and other leading markets, is withdrawn, speakers at a symposium predicted yesterday. Asian property markets - in China and Vietnam especially - are likely to be hit hard while stock markets could take a battering, along with banks and other financial institutions, they suggested.

'There may be a sudden shift in capital flows as a result of fallout from the sub-prime crisis,' warned South Korea's former commerce minister Duck Koo Chung at the conference organised by the Asian Development Bank Institute (ADBI) and the North East Asia Research Foundation (NEAR).

'Coming weeks will be crucial' in this regard, Mr Chung later told BT.

ADBI dean Masahiro Kawai, who told the conference that 'global financial turmoil may continue longer than hoped for', suggested to BT that a flight from Asian property market investment by banks, investment funds and various stock market vehicles could damage these institutions as the property boom unwinds.

The warnings came as a sobering counter to the widely held view that Asian markets and institutions are likely to escape relatively unscathed from the sub-prime credit crunch that has wrought havoc upon major investment banks and others in the US and Europe. The theory of a 'decoupling' of Asian economies from outside problems has similarly been shattered by recent events.

Recent weeks have seen the collapse of a series of property development firms in Japan as US and other investors pulled funds from them. The most recent collapse - developer Urban Corp - marked Japan's biggest corporate bankruptcy this year and the implication of yesterday's warning at the conference was that firms elsewhere in Asia could be facing a similar fate.

Mr Chung told BT that property markets in China and Vietnam are especially vulnerable, while South Korea's property market is also facing problems along with those of other East Asian economies. 'There will be another round of credit crisis in developing economies', as money is 'pulled', he said. Foreign direct investment as well as portfolio investment in many Asian economies has been directed into property, added Mr Chung, who is now chairman of NEAR.

The cause of the US dollar's strength in recent weeks has been partly to do with the repatriation of investment funds from overseas, and this process could accelerate now as a fresh credit crunch threatens, in spite of injections of financial liquidity by the US Federal Reserve, Mr Chung commented. 'This will lead to a further correction in asset markets' in Asia and elsewhere, he suggested.

'We have been planting the seeds of the current crisis for many years,' said Mr Chung, who noted that Asia had supplied much of the financial liquidity that fed asset bubbles in the US and elsewhere. Now that US credit markets have seized up, the Fed is having to pump liquidity but this 'can only jeopardise the anchor position of the dollar' in global financial markets.

Recent Fed actions 'imply an expectation of continuing stress in financial markets', and meanwhile, economic slowdown has hit both Japan and Europe, Mr Kawai noted at the conference.